China: FX options in, speculation out

SAFE will allow Chinese companies to trade FX options onshore, but for hedging purposes only and not speculation. The news could cause some intraday FX volatility but exporters are unlikely to start hedging against the renminbi weakening anytime soon.

The State Administration of Foreign Exchange (SAFE) today (February 16) announced it have given the green light to onshore renminbi options trading but it has made clear this product will be allowed for hedging purposes only. Corporate and banks will be allowed to trade them

“Such framework implies strict control over trading by the regulator, and we expect the market to be heavily influenced by SAFE—somewhat like the spot market is,” said Dariusz Kowalczyk, senior economist at Crédit Agricole CIB, about the regulatory change.

The announcement comes shortly after SAFE allowed foreign exchange (FX) swap trading to commence. The foreign currency reserves manager has indicated that these moves tie in with its commitment to increase FX rate flexibility indicating there will be more intraday volatility in the market.

“[The news] is conducive to continuously push forward the domestic foreign exchange market development, give full play to the market in allocating resources to the basic role,” SAFE said today in a short statement.

The initial impact of the news is expected to be limited as exporters are likely not to want to to pay the premium for buying put options, much preferring to sell calls because they earn a premium and they do not expect to see a rise in the US$/Rmb.

“Initially there should not be much client interest or FX market impact,” Kowalczyk said.

The rules stipulated so far are as follows:

1. European call option and put option style

2. Clients can only buy call/put option. They cannot sell options except to close their positions.

3. When an option matures, clients need to deliver the full amount at the strike price.

4. If clients buy a put option using their current account deposit in the bank, they can pay or receive the spread. If they want to withdraw the deposit before maturity, they need to close the positions.